Consumption-tax

Overview of consumption tax

Entity engaged in domestic transactions and import transactions must file and pay consumption tax in Japan unless they are exempt from consumption tax. These entities include foreign corporations, branch office of international companies, KK/GK and sole proprietor.

Consumption tax is similar to VAT (value-added tax), GST (goods and services tax) or sales tax in some other countries, but there are many of unique aspects in calculating the tax amount.

This uniqueness often hinders the implementation of global accounting system like SAP and Oracle as they need to be tailored to effectively deal with the consumption tax under Japan’s tax law.

Current consumption tax rate is flat rate of 8%, but the rate will be raised to 10% in October 2019 with the introduction of the reduced tax rate for food and beverages.

Type of transaction subject to consumption tax (“C-tax)

Below is a summary of C-Tax categories for typical transactions:

Transaction

C-tax categories

Domestic revenue

Taxable sales

Export revenue

Taxable sales (Exempt)

Interest income

Tax-exempt sales

Sales of land

Tax-exempt sales

Dividend received

Non-taxable sales

Salary

Non-taxable purchase

Medical care and welfare

Non-taxable purchase

Import of product

Taxable purchase

Domestic purchase of product

Taxable purchase

3rd party fee(e.g. consulting fees)

Taxable purchase

Rent

Taxable purchase

Purchase of fixed asset

Taxable purchase

Case 1 (Standard case)

#

Income statement

C-tax (8%)

Domestic revenue

10,000

800

Export revenue

2,000

–

Salary

(5,000)

–

Rent

(2,000)

(160)

Consulting fee

(1,000)

(80)

Profit

4,000

C-Tax (receivable)/payable

560

(Calculation for C-tax)
Revenue 800 – Purchase 240*100% (*1)=560

(*1) The amount of this deduction is limited depending on the percentage of taxable sales calculated by the following formula:Taxable sales
Tax-exempt sales+ Taxable sales

Case 2 (Tax refund)

#

Income statement

C-tax (8%)

Domestic revenue

5,000

400

Export revenue

5,000

–

Salary

(2,000)

–

Rent

(2,000)

(160)

Depreciation

(1,000)

–

Consulting fee

(4,000)

(320)

Profit

4,000

Purchase of Fixed asset

(4,000)

(320)

C-Tax (receivable)/payable

(400)

Calculation for C-tax

Revenue 400 – Purchase 800*100%=-400

Journal entry for C-tax

Accounting system needs to capture the information on whether each transaction is taxable or non-taxable in terms of consumption taxes. According to tax laws, there are two ways to account for C-tax: 1) Tax exclusion method and 2) Tax inclusion method.

1) Tax exclusion method:
Under the method, the accounting system needs to separate transaction amount and C-tax amount for each transactions. Journal entry in the system is like this:

Tax exempt enterprises

New entity with the capital amount of less 10 million yen can choose the consumption tax position as either taxable payer entity or exemption entity. The exemption period is limited to the first two years. From the third year, whether or not the company is required to file and pay consumption tax is determined based on the sales amount of two years ago. In other word, if the sales amount in the first year (e.g. FY2016) is less than 10 million, the company can choose the tax exemption position in the 3rd fiscal year(e.g. FY 2018).

Regardless the tax benefits above for small business, if the company meets a) and b) below during the exemption period, the company is required to file and pay the consumption tax from the following fiscal year.